Popular Candlestick Patterns To Follow in Cryptocurrency Trading
As a follow up to an earlier article we wrote about identifying proper entry and exit points when trading cryptocurrencies, there are many signs that can help you to correctly predict an entry or exit and which are very crucial to saving your wealth.
Using candlestick patterns is a common practice by cryptocurrency traders today.
Candlesticks are the bars appearing on the crypto trading charts as plotted using various analysis tools such as Tradingview.com. They derive their name from their candle-like appearance. Essentially, every bar on the chart is called a candlestick, but, together, these bars will almost always form a pattern when reading together and these patterns tell a lot about cryptocurrency market price and volume trends. They always show high, low, opening and closing prices of a certain digital currency in a specific period, but when they together form patterns, they can be used in predicting price growth, decline or reversal of any stock and assets.
Of course, the candlestick patterns are never 100% exact or perfect for predicting future prices but are an important attempt to identify most probable variations in future price actions and movements.
Each of the candlesticks will have a red or green color. If the color is red, then the price at the end of the chart period was lower than at the beginning and vice versa. If the price at the end of the period was more than at the beginning, then it will be green in color.
One of the most popular ways traders in cryptocurrencies can identify the entry and exit points of the trade include the use of candlestick patterns. Therefore, the purpose of this article is to help any trader to understand what the likely candlestick patterns can be when using the charts for this purpose, the different types of patterns, and hopefully how to use them when trading cryptocurrencies.
A standard bullish or bearish candle is very common and is signified by shadows on the two ends of the candle. The ends or the body are not extraordinarily long. Although not much can be deduced from a single standard candle, numerous standard candles to form a pattern that can tell where the market is heading.
Types of candles
Looking at crypto charts, there are four main types of candlesticks that you can follow when trading cryptocurrencies in the short-term range. They include bullish engulfing candles, bearish engulfing candles, bullish hammer reversals, and bearish hammer reversals.
1. Bullish engulfing candles are green and each of the candles meets the price range of the previous one. It closes at a price higher than that of the previous candle and so is a more bullish indicator. It signifies that the price will be rising very soon and it is a good time for a cryptocurrency.
These kinds of candlesticks are formed when the price is moving beyond both the high and low of the previous candlestick price. It tells a trader that the price has moved down, found some support or buying volume and then made a bullish move back up by breaking the previous high. It signifies a sustained upward move or change in trend.
2. The bearish engulfing candle is the opposite of the bullish engulfing candle and therefore the rules they follow are also opposite. They signify that the price is about to go down very soon and is a warning to investors on a short-term gain.
The present candle will break the previous candle's high and low and therefore signifies a sustained drop in price or a sharp change in trend. This type of pattern can happen at the top of a trend or within.
3. Bullish hammer reversals contain very long wicks at the bottom, short wicks at the top and a short price range. They can either be red or green but are usually followed by a huge uptrend and are therefore great for those looking for potential outbreaks.
4. Bearish hammer reversal is opposite to the bullish ones and contains wicks that are larger to the upside, have short wicks at the bottom, and they have a thick range of price action.
For all the types of candlesticks, tails or wicks of a candle mark the highs and lows in price which occurred over the price period and reveal where the price closed in relation to the high and low. The upper and lower shadows are common during an average day of trading. They do not mean that much. However, strong shadows can form and create a trading signal of real importance during a news event or happening likely to affect prices and you might look at the signs to determine directions.
All the same, the candle wicks, shadows and tails indicate support, resistance and potential turning points in the market.
Common candlesticks from crypto charts are as follows
Hammer
This kind of pattern is characterized by hammer-like bar(s) and appears when prices are on a downtrend direction, and signifies that the bears are exhausted and the price will soon go up.
The hammers form when market participants sharply reject the support or resistance.
The hammer sign has a long lower tail and a small body near the top of candle and shows that the price opened and fell quite a distance, but rallied back to close near (above or below) the open. It is clear sign that buyers stepped into a weak market and are “hammering out a bottom.”
When a long lower tail–hammer–is seen near support, the long lower tails, which are common place, might be significant. They show that sellers tried to push the price through support but failed and buyers are likely to take the price higher again.
Inverted Hammer
Inverted Hammer will have a shape like an hammer but upside down and will be a sign of a support level and attempts of bulls to push the price up. The shadows appear but they are not so strong to do it at the moment. It is a time to stop selling because there is a chance prices will go up soon.
Hanging man
Hanging man pattern is characterized by the shape shown in the figure and will appear during an uptrend, but are signs that you should resist buying the cryptocurrency since you will have an opportunity to buy soon when prices drop.
Shooting Star
Shooting Star is characterized by the pattern shape shown in the figure and is another good reversal pattern indicating that bulls are exhausted and price in most cases will go down. This sign will signify a trend reversal in prices.
Spinning Top
A spinning top forms when the open and close prices are close together despite there being a wide range of prices throughout the period. It can signify indecision between buyers and sellers and will occasionally be followed by a reversal in price trends.
If forming after a lengthy bearish or bullish trend, it suggests that the trend is losing momentum and a reversal could soon come into play.
Marubozu
Marubozu is a candle that is easy to spot and can either be green or red. It does not have a shadow and its body is long and typically dwarfs the previous candle in length. The sign means that the market was strongly bearish or strongly bullish depending on whether the candle is red or green.
Doji
Doji assumes the shape shown in the figure and is an indicator that the market is unsure of the future movements and waiting for some external signs to respond. It signifies a reversal point but the the signal is not so strong as the previous ones. It is a time to stop trading and watch for other market signs.
The Doji signifies indecision in price action and forms at areas where the bulls and bears are commencing battle and fighting each other for direction. The body of the candle is usually very small with a close near the open price. It might also have long wicks formed to the high and low, which were tested but fought back from by each side. The pattern is usually followed by an upwards or downwards sustained move in the price and it breaks beyond the Doji candle.
For instance, if the sign appears after an inverted hammer, it signifies that a time to close currently open or active buy trades because bulls are lacking power. The sign does not necessarily mean a reversal of prices: prices can still continue to go down even after this sign appears.
Again, although it could be broken either way by the bulls or bears and hence not a trusted entry point for a trade, it offers a heads up that the sentiment is changing.
A long legged doji comes about when the open and close prices are the same and is still an indecision among buyers and sellers and since there is an even amount of buying and selling pressure, so the price ends up going nowhere. Like the typical dogi star, it can be a sign of trend reversal or consolidation.
A gravestone Doji is characterized by a long upper shadow and non-existent lower shadow, and suggests that the sellers are reversing the period's buying pressure and the supply and demand at the price point is reaching equilibrium. It usually signifies that a trend reversal may be in the works.
This type of candle has a long upper tail and a small body near the bottom of the candle, opposite of the hammer. The tail is a sign that the price opened then rallied quite a distance, but then fell to close near (above or below) the open during that period (the 1 minute, 5 minute or daily candlesticks). It signifies that sellers stepped into a hot market and created a graveyard for buyers.
When a long upper tail–gravestone–is seen near resistance the long upper tails are significant unless a new resistance level is being set. It is a sign that buyers tried to push the price through resistance but failed and the sellers are now likely to take price lower again.
Other factors
In addition to watching for these signs, using big time-frame charts (4 hours or day) is recommended when looking for candlestick patterns because cryptocurrency exchanges do take commissions for trades. Look for greater movements to ensure the commissions will not eliminate your income. It is also advisable to not analyze the current candlestick but to wait for the next one to start. Again, besides doing analyses using candlestick patterns, it is advisable to watch for news and other events and factors that will influence prices.
For instance, while these candlesticks patterns themselves might be as a result of normal market activity, news announcements and events might also have an impact to cause disruptions. Therefore, watching other factors is very advisable.
